Annuities

An annuity is an insurance product that guarantees a periodic payment of a predetermined amount for a fixed term. Once the term has elapsed, these products are spent and offer no possibility of any future payments, even if the annuitants (i.e. those intended to receive the periodic payments) are still alive. At a time when Canadians are living longer than ever before, it is important that incomes last just as long. Annuities don't require ongoing management on your part. You simply place your money into an annuity and you will receive a guaranteed income. However, once an annuity is issued, neither you nor the insurance company can change the amount or terms of the annuity. Annuities can be purchased with registered funds from individual RRSPs, locked-in RRSPs, Pension Plans or Deferred Profit Sharing Plans. Annuities can also be purchased with "after-tax" or "non-registered" funds.

Annuitants may choose to purchase these products gradually by making periodic payments, or they may make a purchase with a single lump sum payment.

Reasons why purchasing annuities would be ideal for you:

• You require a guaranteed stream of income for life
• You require a guaranteed income for a specific time period
• You are not interested in making on-going investment decisions and want a simple investment
• You do not want to outlive your income
• You wish to diversify your investment portfolio

There are two general types of annuities:

Term Certain Annuities:

Term certain annuities provide investors with a guaranteed periodic payment over time, but once they're done, they're done. The payments cease and the annuity contract ends.

Life Annuities:

Life Annuities will provide you with a guaranteed regular income for the rest of your life, no matter how long you live. Life Annuities can be purchased as a single life, as long as the sole annuitant is alive or as a joint life, which pays a periodic income as long as one of the two joint annuitants is alive.

Main advantages of Annuities:

1. Paying a single lump sum to an insurance company will guarantee that annual or monthly payments are guaranteed for the full fixed term even if the annuitant(s) passes away before the end of that term. Annuities are insurance products and in the event of death of the annuitant the beneficiary would receive any remaining payments.
2. The income stream is very tax efficient as the payment is considered partly a return of capital and the balance interest income. Term certain annuities have a major tax advantage in that the return of capital is the same throughout the term whereas in reality, the majority of the first year payments are interest income.
3. An annuity contract (other than a life annuity without a guarantee period) allows you to designate a beneficiary. This means that upon death, any benefits will be paid directly to the beneficiary, avoiding unnecessary delays, probate, and legal costs. When you designate certain family members such as spouse, child, grandchild or parent as beneficiary, the funds may be protected from creditors.

Main disadvantages of Annuities:

1. The annuitant(s) may outlive the term of the annuity and be left with no money to pay for any living expenses.
2. The payment is not indexed to inflation. Inflation in Canada has averaged 2.58% over the last twenty years. Over time, the fixed payment will not be able to pay for the same level of services that are being supplied today and over a longer period of time this will likely be a problem.
3. The payment amount is fixed and cannot be changed once the annuity is purchased. This inflexibility can be a problem as it is very likely that there might be a need for more funds to pay for unexpected medical expenses or for more expensive alternative care services. An annuity cannot accommodate changes in funding requirements.

Income payments may begin immediately or can start at some future date. The amount of the income payment will vary depending on the type of annuity selected and the features chosen. Generally speaking, several factors are taken into consideration to determine the amount of your income payment. The amount of income provided through your annuity is generally determined at the time of purchase and depends on:

• The amount of money you deposit – the more money, the larger the payments
• Current interest rates – higher interest means higher payments
• If you want your payment amount indexed (to increase over time),
• Your age - generally, the older you are, the larger the payments
• Your sex - men and women have different life expectancies - the longer you are expected to live, the lower the payments
• The number of years you want to guarantee your income payments.

I will explore various income scenarios with you and help investigate the type of income you could expect in your situation.